Meanwhile Back at the Ranch -The Family Defined Benefit Plan


Many of you may recall a series of articles that I wrote on JD Supra regarding the benefits of business owners having their employees covered under a collective bargaining agreement with a labor union. The Internal Revenue Code provides an important exception for ERISA-based plans that basically says that if your employees are covered under the collective bargaining agreement then the business owner does not have to include the employees in the business’s benefit plans. In the current environment, the benefits of this provision may be “supersized”. The combination of increased tax rates and new healthcare law may have many business owners saying – “Enough is enough”.

The Family Defined Benefit Plan is a fully insured defined benefit plan under IRC Sec 412(e)(3) that allows a business owner to excluded his “rank and file” employees and make a contribution for the business owner and spouse if desired. The only mandatory contribution for the employees is a 3 percent match in the union’s 401(k) plan.

The fully insured defined benefit plan provides for the largest tax deductible contribution into a qualified plan. It provides for a rock solid guaranteed retirement benefit of a maximum of $205,000 per year. If the spouse is included, the family defined benefit is $410,000 per year. This benefit is not altered by the volatility of the stock market. Nothing like having your retirement account go down by 40 percent in the year of retirement.

Yes, the insured defined benefit is a very conservative plan with the highest contribution requirements. I am certain that you might be able to achieve a higher investment return in other investment vehciles but you miss the point. The actual benefit of the plan is really two-fold – (1) The retirement benefit plus (2) the tax savings reinvested presumably at a higher rate than the guaranteed rate within the insurance contracts within the fully insured DB plan. Suppose the tax savings are invested in another tax deferred vehicle. There is nothing wrong with higher tax savings.

The business owner also has the ability to layer a defined contribution plan on top of the fully insured DB plan. The professional service company will be able to max a full 401(k) contribution of $17,500 and a catch up contribution of $5,500 if the business owner is age 50 or older. The business will be able to make a profit sharing contribution equal to 6 percent of earned income. Multiply that by two if the spouse is included. A 50 year old doctor might be able to contribute close to $400,000 in a series of pension plans. This quite the nice deduction without any audit risk.

Alot of you might say “Are you crazy, telling me to have my employees to joint the union. they will be on strike by Monday.” Is your hatred of unions worth more than the $200,000 plus tax benefit that you will receive on the way to a secure retirement with a guaranteed retirement benefit as the foundation of your retirement income? Your potential distrust or dislike of unions might be overstated and exaggerated.

The structure of the Family Defined Benefit is designed in a manner to buffer the business owner’s dealings with the union which is unfamiliar territory for the business owner. The costs and benefits for the business owner far exceed any valid concern with having unionized employees. The business owner does not even have to worry about negotiating directly with the union. Everything is done for him where the union is concerned.

The tax winds are shifting quickly. Add the fuel of healthcare if you are a MD, and pretty soon you will wonder how quickly you can get out of the Rat Race. The Family Defined Benefit Plan will give you a very quick start.

About gerrynowotny

I am a tax and estate planning attorney with a JD and LL.M in estate planning from the Univesity of Miami School of Law. I have worked in the life insurance industry for twenty three years and the last eleven in private placement life insurance.
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